GOLD UP-DATE

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Even though there was a lot of bullish news for gold last week, trading in the yellow metal remained mostly muted.

The first bit of news that should have had a bullish impact on gold was the news at the beginning of the week. It was the announcement that Moody's had downgraded Ireland's sovereign debt rating from Aa1 to Aa2. And, then the EU and IMF suspended talks with Hungary.


They urged the country to do more to cut the budget deficit before resuming the use of the bailout funds. The breakdown in talks means that Hungary will not have access to remaining funds of about 5.5 billion euros (US$7.1 billion) in its 20 billion euro financing deal until the review is completed. Strangely, this news didn't do much to the value of the Euro or the price of gold.

Then, two days later during Federal Reserve Chairman Ben Bernanke's testimony to the Senate Banking Committee which began in Washington on Wednesday he said central bankers "remain prepared" to act as needed to aid growth and "we also recognize that the economic outlook remains unusually uncertain." Bernanke also said.  "We will continue to carefully assess ongoing financial and economic developments, and we remain prepared to take further policy actions as needed to foster a return to full utilization of our nation's productive potential in a context of price stability." It is widely expected that the Fed will increase monetary stimulus in a bid to keep the economy growing and reduce a jobless rate from close to a 26-year high.

Many analysts believe that this is a message that the Fed will engage in further "quantitative easing," which is a new word for printing more money. Even if the US government has no other choice the consequence of this is going to be further debasement of the US dollar which will boost gold prices. But, there was little to no reaction in the gold market to the statements made by the Fed Chairman.

The main reason for the lack of response from the gold market was due to the widely awaited results of the stress tests conducted on 91 European banks. When the results were finally released, the reaction from the market was extremely muted. Seven of 91 European Union banks subject to the stress tests failed with a combined capital shortfall of 3.5 billion euros ($4.5 billion). These banks are Diada (Spain), Espiga (Spain), Unnim (Spain), Banca Civica (Spain), Cajasur (Spain), ATEBank (Greece) and Hypo Real Estate (Germany).

Another reason why the markets hardly reacted to the news is perhaps partly due to the fact that the report was not released until after the European markets were closed when liquidity was significantly reduced. Also, many analysts claim that the tests were far from being stressful.  One other problem now surfacing in regards to the stress test is that many analysts are not convinced that this was a real test.

The seven banks that fell short are already in some way supported by the government, and therefore pose little threat. The next concern is over the methodology of the tests themselves. The scenarios don't account for a sovereign default or a particularly significant regional crisis. Shortly after the disclosure, the euro tumbled to $1.28 from $1.30, but it crept back to $1.29 after the results were released. The prices of August gold finally closed down $7.80/oz at $1,187.80/oz on the Comex division of the NYMEX.

During June, the Russian Central Bank (RCB) purchased another 200,000 ounces of gold. Their total gold reserves now stand at 22.8 million troy ounces… which is 709.2 tons. So far this year, the RCB has purchased 2.1 million ounces for their reserves. In the second quarter of this year, the central banks of Venezuela and the Philippines also bought gold.

Holdings in the world's largest gold backed exchange traded fund, SPDR Gold Trust (GLD) have fallen from 1320.436 tons on June 30 to 1302.046 tons on July 23.

In an article published by Bloomberg on July 21, gold trading in London declined in June as average daily volumes fell 16 percent, according to the London Bullion Market Association. An average of 20.8 million ounces of gold traded daily, down from 24.7 million in May, the LBMA said in an e- mailed statement.

TECHNICAL ANALYSIS

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From the end of June, the price of gold has been stuck in a two-tier trading range.  The higher level is set between $1200/oz to $1220/oz and the lower level is trading between $1180/oz and $1200/oz. In the short-term it is possible to see prices retreat towards the 200 day MA which is now at $1144/oz, but I favour more sideways action. The price of $1180/oz also represents a 38.2% Fibonacci retracement of the move that began in February this year and which peaked in June.

About the author

David Levenstein is a leading expert on investing in precious metals .He brings over 30 years experience in futures, equities, forex and bullion.

For more information go to: www.lakeshoretrading.co.za

Information contained herein has been obtained from sources believed to be reliable, but there is no guarantee as to completeness or accuracy. Any opinions expressed herein are statements of our judgment as of this date and are subject to change without notice.